The Billion-Dollar Shack

By Jack Hitt

Published: December 10, 2000

In a ferocious tropical heat, I stood a few feet from the front door of the building -- a shack, really -- that some say brought Russia to its knees and destroyed it as a modern nation. There is no plaque commemorating this achievement, and I may have been the first to make this pilgrimage. After all, there are only two flights a week out of Brisbane, Australia, that will even take you here -- here being the nation of Nauru, a tiny island 1,200 miles east of New Guinea in the Pacific Ocean, just south of the Equator. It may be about as far away from everywhere as you can get and still be somewhere.

Nauru is not a place you just visit. The beaches are raked with razorlike coral formations, and there is no natural harbor. Foreigners, who land on the airstrip left by Japanese conquerors in World War II, are confined mainly to Australian engineers who work at the island's nearly depleted phosphate mines.

Although this island is one of the most obscure places on the planet, Nauru has lately gained a name for itself in Western international-finance circles. Amid the recent proliferation of money-laundering centers that experts estimate has ballooned into a $5 trillion shadow economy, Nauru is Public Enemy No. 1.

The Group of 7, the organization of seven leading economic powers, has a task force in Paris that routinely ''names and shames'' the dozen or so nations -- from the Philippines to the Cook Islands -- that provide a haven to illegal money. In this rarefied company, Nauru stands out. According to the deputy chairman of Russia's central bank, Viktor Melnikov, in 1998 Russian criminals laundered about $70 billion through this shack in Nauru, draining off precious hard currency and crippling the former superpower. Just to put that in perspective, last year's Bank of New York money-laundering scandal, which rocked the financial world, washed $7 billion.

Half of that went through Nauru, too.

As a result, Nauru is suffering under what are arguably the harshest sanctions imposed on any country, including those against Iraq and Yugoslavia. Western banks ranging from Deutsche Bank to Bankers Trust no longer permit any dollar-denominated transactions that involve Nauru. In the digital age, this action packs the same wallop as an old-fashioned gunboat blockade.

Nauru wasn't always an outlaw nation. A decade ago, it was an up-and-coming country in the old global economy -- having done quite well with a singular export derived from its geographical isolation. For a million years, migrating birds took a bathroom break on this coral sanctuary, leaving the island's interior hummock composting rich veins of dense phosphate. For a time, exports of this key fertilizer ingredient made Nauruans among the richest people per capita in the world. But with the mineral wealth running out, Nauru's finest minds have turned to the heady new-economy riches of international banking. Specifically, they've opted for offshore banking, whereby a country registers new banks with loose rules and permits them to operate anywhere in the world -- except onshore in the country of registry.

Nauru's new banking system was rumored to be entirely contained within a government institution called the Nauru Agency Corporation, which was said to be nothing more than a bunch of humming computers sitting inside . . . the shack. By knocking on its door, I hoped to look into the face of the new global economy.

Getting to this place wasn't easy. An official representative of the government told me that no journalist would be permitted on the island. So I went as a tourist. When I announced my status to the ticket clerk in Brisbane, she laughed in my face.

But Customs in Nauru -- I landed at 4 a.m. -- was too tired to care about my reasons for visiting, so I was cleared easily and caught a ride to the Menem, one of two hotels on the island. In my room was a printed notice asking guests to be considerate, waterwise, since the country was in its third year of a drought. My attempt at a shower ended 30 seconds later.

At 7 a.m., I decided to walk up the road about two miles to a knot of buildings that locals expansively call ''the capital city of Yaren.'' Wealth on a remote island manifests itself in peculiar ways. Every Nauruan seemed to own a car, but many of the houses were made of unpainted cinder blocks. Because of the drought, the yards were configurations of dirt. Trash, too expensive to export, was simply collected in piles in the back, as in Appalachia. Even at the shore's edge, many of the island's palm trees were dead from drought -- coconutless, frondless poles curving obscenely toward the sun.

Returning to the hotel, I set about trying to locate the Nauru Agency Corporation. None of the clerks had ever heard of it. The driver of the island's only taxicab didn't know either, but he did react to my laments about my roasting flesh by driving me to the only souk on the island that sold hats. A passing cargo ship must have dumped a pallet of them, all the same: bright red baseball caps bearing the slogan ''KGB -- The Secret Is Out.'' My covert walkabout was ambling into the realm of farce.